Hampden Underwriting Plc, a Lloyd’s of London firm which gives investors direct access to the Lloyd’s market, largely focusing its portfolio on property insurance, reinsurance and motor business, has announced a 50% collateralized reinsurance quota share agreement with Bermudian reinsurer XL Re.
Hampden Underwriting said today that it has released a significant amount of its capital through an annually renewable collateralized quota share agreement beginning with the 2013 accounting year. The deal has a minimum one year term but Hampden will likely be keen to renew it. 50% of the firms 2013 exposures have been ceded to XL Re which will allow Hampden to release £4.1m of its £8.2m of Funds at Lloyd’s which will be put into new investment opportunities.

While it has ceded this business to XL Re the agreement will continue to benefit Hampden as the arrangement includes a performance related commision on the profits of the underlying ceded business of between 10% and 20% in each period. That means that while XL Re will manage the business and pay the claims Hampden can profit where performance exceeds pre-defined levels.

Sir Michael Oliver, Chairman of Hampden Underwriting, commented on the deal; “This transaction presents Hampden Underwriting with a welcome source of capital with which to fund near-term opportunities the Company wishes to pursue and does so on attractive commercial terms. The Board regularly considers the relative merits of alternative sources of capital and is confident that this is an appropriate funding option at this time.”

Nigel Hanbury, Hampden’s Chief Executive, added; “Current market conditions continue to present the Company with attractive investment opportunities which require funding. We are delighted to have been able to successfully conclude this transaction which provides the Company with a modest war chest with which we can continue to progress acquisition opportunities. The reinsurance terms provide a profit commission in good underwriting years and a reduced risk exposure in disappointing underwriting years in a spectrum that is both equitable and commercially attractive. Its annually renewable feature provides Hampden Underwriting with certainty for 2013 as well as the appropriate opportunity to review the arrangement from time to time.”

It’s an interesting transaction for Hampden Underwriting as it effectively reduces its risk, frees up capital which can be used to underwrite more business and offers this profit commission as well. For XL Re, the book of business must be attractive enough that it expects to make a reasonable profit from its share of the books performance.

The deal has been completed using a special purpose insurance vehicle. Hampden Underwriting has entered into a reinsurance agreement with Hampden Insurance PCC (Guernsey) Limited – Cell 6, a newly-formed special purpose vehicle. This vehicle in turn has entered into a reisnurance agreement with XL Re.

XL Re takes on the risks and rewards of 50% of Hampden’s 2013 underwriting business, although the activities themselves and the underwriting capacity will remain Hampden’s. XL will collateralize the agreement with a letter of credit provided to Lloyd’s for £4.1m which enable Lloyd’s to release an equivalent amount to Hampden.

XL will pay the profit commission of 10% to 20% of profits from the business ceded to Hampden via the special purpose insurer depending on the results of the book of business. XL will also pay a fee to the SPV of 1.5% per year of account of the value of the letter of credit provided to Lloyd’s. The SPV will then pay this on to Hampden, less its share of the SPV management fees, costs and expenses which are estimated to be approximately £12,500 per annum.

According to the release on this deal, the SPV Cell 6 is ultimately 51% owned by Nigel Hanbury (a director and 14.8% shareholder in Hampden Underwriting) and 49% by Hampden Capital plc (a 11.9% shareholder in Hampden Underwriting). Hanbury and a number of Lloyd’s underwriting entities ultimately owned by him and his family have entered into reinsurance agreements with Cell 6 on a pari passu basis.

This doesn’t appear to be a third-party capital collateralized reinsurance deal but it is a great example of the types of transactions third-party capital is often put to work in allowing investors to access the returns of the reinsurance market. This deal actually frees up capital, some of which will be from third-party investors in Hampden Underwriting, so it can be put back to work on new investments. We also wonder, however, whether any of this risk will end up in XL’s capital market operations, given the nature of the transaction as a collateralized quota share.